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By Yoruk Bahceli
(Reuters) – Germany’s finance agency said on Wednesday it had increased the size of bonds outstanding for its own account to lend to investors in return for cash, helping to cover funding needs stemming from the crisis energy.
The financial agency, which manages Germany‘s debt, will increase the size of 18 bonds by 3 billion euros each, totaling 54 billion euros ($53.00 billion), on its own books to be used on the market for repurchase agreements, or repos, where it lends bonds to investors in exchange for cash.
This will give the German government the flexibility to cover financing needs arising from the energy crisis, the agency said.
The move reflects its strategy at the height of the COVID pandemic in 2020, which saw the agency increase its own obligations by 42 billion euros in the face of unexpected funding needs.
This latest increase was for bonds that the agency said were in high demand.
German government bonds are a key market collateral for euro zone investors and have been in short supply after years of bond buying by the European Central Bank. This shortage makes it difficult for investors to borrow them from the repo market.
The financial agency typically keeps a small amount of the bonds it sells in regular issues on its own books, uses them for repurchase transactions, and lends them to investors in exchange for cash.
It can increase these operations to keep markets functioning and did so earlier this year when it increased a bond following the invasion of Ukraine for use in the repo market.
“Obviously the real reason is the reduced liquidity of the Bund; the latest auctions speak for themselves,” said Michael Leister, head of interest rate strategy at Commerzbank, referring to recent German debt sales which have seen historically weak demand.
Analysts are also concerned about the scarcity of collateral causing dysfunction in already volatile markets towards the end of the year, when portfolio managers accumulate collateral to reduce risk during the holiday season, when liquidity is scarce. .
“It will certainly reduce some year-end concerns,” said Lyn Graham-Taylor, senior rate strategist at Rabobank, calling the decision a “big deal.”
The German two-year swap spread, which measures the difference between the bond yield and the fixed portion of a two-year interest rate swap that investors pay to protect against rising rates in exchange for rate payments variable, narrowed 6 basis points (bps) to 91 bps, the smallest gap since early September.
But it’s still up about 60 basis points this year, underscoring the dearth of collateral available. It recently reached its widest level since the Eurozone debt crisis.
“This reaction is rather muted considering the moves we’ve had in recent months,” Commerzbank’s Leister said.
Analysts said the repo market support from Germany’s decision would likely be temporary.
As the European Central Bank has decided to remunerate government deposits with euro area central banks only until April 30, debt offices will likely be prompted to reduce larger cash balances, which will make it less likely to lend bonds to investors in the repo market in the future. .
The details of the bonds increased in size are as follows (in billions of euros):
Title Coupon ISIN Maturity Volume New volume
Federal 0 DE0001104867 15-Dec-23 3.0 18
Federal bond 0.5 DE0001102374 February 15, 25 3.0 30.5
Federal Note 0 DE0001141810 Apr 11 25 3.0 23
Federal bond 1 DE000110238 Aug 15 25 3.0 30.5
Federal bond 0.5 DE0001102390 15-Feb-26 3 33.5
Federal Note 0 DE000114183 10-Apr-26 3 28
Federal bond 0 DE0001102408 15 Apr 26 3 32.5
Federal bond 0.5 DE0001102424 Aug 15 27 3 32.5
Federal bond 0.5 DE0001102440 15-Feb-28 3 28.5
Federal bond 0.25 DE0001102457 Aug 15 28 3 28.5
Federal bond 0 DE0001102556 15-Nov-28 3 27
Federal bond 0.25 DE0001102465 15-Feb-29 3 29.5
Federal bond 0 DE0001102473 Aug 15 29 3 29.5
Federal bond 0 DE0001102499 15-Feb-30 3 28
Federal bond 0 DE0001102531 15-Feb-31 3 28
Federal bond 0 DE0001102580 15-Feb-32 3 31
Federal bond 1.25 DE0001102432 Aug 15 48 3 34.5
Federal bond 0 DE0001102572 15-Aug-52 3 19
($1 = 1.0190 euros)
(Reporting by Yoruk Bahceli; Editing by Amanda Cooper)